Unless you’ve been isolated at your country getaway for the past year – and with the coronavirus pandemic raging, we can’t blame you – you are probably aware that Joseph R. Biden Jr. won the 2020 US Presidential election. Along with a sweeping vaccination program against COVID in his first 100 days, President Biden has some other plans that you might also want to be aware of.
While tax reform has been specifically addressed by the White House, other US Senators have also introduced legislation that would affect the wealthy and highest earners in the United States. In light of these proposals, those who could be affected by them should be prepared to plan ahead by learning about the benefits of EU trusts and Hybrid trusts registered in Hungary.
Biden’s Proposed Tax Plan
On April 28, 2021, President Biden announced the American Families Plan, which would cost an estimated $1.8 trillion. To help pay for the plan’s programs, it proposes increasing taxes for wealthy individuals, which would also include a substantially higher capital gains rate. More specifically, the Biden Administration’s plan would increase the top income tax rate from 37% at present to 39.6%. According to the White House this rate would only apply to the top 1% of taxpayers. This would be a reversion to the top income tax rate prior to the tax cuts of 2017.
However, the tax on capital gains would change significantly. Rising from 20% to 39.6%, the top rate on long-term capital gains would almost double. The current net investment income surtax of 3.8% paid by high-income taxpayers would likely also still apply. This would set the new top federal tax rate on capital gains at 43.4%, which is almost double the present top combined rate of 23.8%.
The White House claims that only taxpayers whose incomes exceed $1 million would be subject to this higher tax on capital gains, but it’s unclear if the $1 million threshold would apply per individual taxpayer or per return. If it’s according to an individual basis, the threshold for a joint return would be $2 million, although the impact of this change would vary by state, because some states have no income tax at all. Others exclude capital gains or tax them below regular income tax rates, while some tax capital gains at their regular, ordinary-income tax rate.
Other Wealth Tax Proposals
Besides the proposal set for by the Biden administration itself, other Democratic Senators have been emboldened by their new slim majority in Congress and have put forward tax proposals affecting wealthy individuals of their own. One is called the Sensible Taxation and Equity Promotion (STEP) Act introduced by Senator Chris Van Hollen of Maryland.
Currently, when someone dies with assets that increased in value during their lifetime, such as real property, income taxes are not collected on these capital gains. Rather the basis of the assets are “stepped up” to the value upon death. This legislation would close this “stepped-up basis” loophole by taxing unrealized capital gains when heirs inherit the assets. Focused on taxing wealthier families, the bill would allow all individuals to exclude up to $1 million in unrealized capital gains from this tax. The act is co-sponsored by Senators Bernie Sanders of Vermont and Elizabeth Warren of Massachusetts, who also have their own proposals.
Senator Sanders recently proposed the “For the 99.5% Act,” which would dramatically change estate planning by reducing existing federal estate and gift tax exemptions. It would also increase estate tax rates, limit lifetime transfer strategies, and impose new rules and regulations on certain types of commonly used trusts.
While Senator Sanders’ plan focuses on reducing estate and gift tax exemptions, Senator Warren intends to tax net worth. Her wealth tax would apply a 2% tax to individual net worth above $50 million. This would include the value of stocks, houses, boats and any other assets, after subtracting out any debts. It would add an additional 1% surcharge for net worth above $1 billion.
How can an EU or Hybrid Trust registered in Hungary be a safe haven?
For parties concerned about how the potential impact of these wealth tax proposals would affect the current management of their wealth, they should consider a pair of trusts offered by Primus Wealth, an international wealth and asset management company, based in Luxembourg.
The first is a general European Union (EU) trust registered in Hungary. The fact that the trust is based in the EU means that many of the same assurances are offered as ones based in the United States; in particular, economic, political, social and legal stability. Those keeping funds in EU trusts can be assured that local governments and institutions are bound by the rule of law.
To this end, EU trusts offer 4 layers of legal protection. First and foremost is local legal protection, in which the detailed regulation of the trust is set out. Second, is the broader legal protection of the EU, assuring privacy, individual rights, as well as ownership rights. The last two layers of legal protection are the Investment Protection Treaty Network and the Double Tax Treaty Network. Benefits of the Double Tax Treaty Network include, the prevention of double taxation and a maximum 10% tax withholding rate.
Hybrid trusts offered specifically in Hungary are another consideration. Trusts were first implemented into the Hungarian Civil Code in 2014. Thereafter, legislators introduced the asset management foundation (“AMF”), as another solution for wealth planning in 2019. The AMF is a unique hybrid vehicle which entwines the concepts of a trust and a foundation. Ultimately, this means that the AMF is a special kind of foundation, which may perform asset management, including trust relationships, as its main activity.
A trust established through the AMF also enables several exemptions not typically offered to more generic trusts. It first exempts them from a Civil Code rule limiting trusts to 50 years, allowing unlimited duration. Second, it exempts trust donors and beneficiaries from being restricted in giving instruction to the trustee, meaning they have greater flexibility to determine how the trust’s funds are spent. Finally, it exempts trusts from having to disclose information about parties involved, even in the case of inquiries from public authorities.
In either case, Hungary is an ideal place to have such a trust, largely because enforcement of foreign judgement in Hungary is extremely difficult. For instance, Hungary does not recognize US civil court judgments. In such cases, the creditor of the settlor must take legal action in Hungary against the trust donor and the trustee. They must also prove that the transfer of the trust asset was a fraudulent one. The burden of proof lies with the creditor, and the fraudulent transfer must be proven beyond a reasonable doubt.
For these reasons, high net-worth individuals should think outside of the box and investigate new options, such as the EU and Hybrid trusts registered in Hungary, as these non-domestic options can provide greater asset and privacy protection for US citizens.